Hong Kong Equity | China Consumer Goods Company in-depth Uni-President China 统一企业中国 (220 HK) ACCUMULATE Lukewarm noodles and drinks Share Price Target Price Uni-president Enterprises Corporation, the largest F&B conglomerate in Taiwan, HK$7.74 HK$8.2 seek to expand its global market and established a business in China through the subsidiary company, Uni-President China (“UPC”) in 1992. The overall instant noodles and beverage industry in China slipped over the past few years and have China / Consumer goods / Food & Beverage seen a recovery. The trend transformed to the rising demand for premium food and health-conscious. With the strong product innovation and diversified 26 November 2018 products, we believe UPC can continue its upward trend in profits. We thus initiate coverage on UPC with ACCUMULATE rating and DCF-based TP HK$8.2. Cyrus Tai (SFC CE: BKJ685) Strong product innovation compared with peers. Consumers in China trend to seek (852) 3519 1292 new flavors, brands and products, resulting in product lifecycles shrinking. Therefore, [email protected] innovation is important to drive industry growth. UPC launched lots of new products in recent years; we are waiting for other star products like “Soup Daren” and “Classmate Xiaoming” to boost sales growth significantly in future. Latest Key Data Total shares outstanding (mn) 4,319 A healthy pace of growth in Q1-Q3 2018. UPC posted its unaudited 3Q18 results; the Market capitalization (HK$mn) net profit increased by 9.3% yoy to 399 million yuan in 3Q18, up 19.1% yoy to 1.1 billion 33,432 yuan in the first three quarters of 2018. Although management mentioned the sales Enterprise value (HK$mn) 31,800 growth of instant noodles and beverage were both slowed down from 2018H1 due to 12M daily turnover (HK$mn) 48.7 the impact of weather conditions and high-base effect, the sales performance was 12M volatility (%) 42 in-line with the market and UPC controlled its channel inventory well. We believe UPC PEG FY17-19E (X) 2.3 can achieve mid-single digit percentage sales growth for 2018. RoE avg FY17-19E (%) 8 P/B FY18E (x) 2.2 Maintain margin growth outlook. The sales contribution of high-end products with Net debt/equity FY18E (%) Net cash high-margin will increase continuously due to the consumption upgrades. On the other hand, UPC continues to control its costs effectively such as saving A&P expenses and labor cost. Performance (%) 1M YTD 12M Tend to maintain a high dividend payout ratio of 70%. UPC increased their dividend payout ratio to 70% in 2017 which was higher than the level of 20% over the past 5 Absolute (2.5) 18.4 21.9 years. The management has no significant M&A and CAPEX so far. We thus believe UPC Relative to HSI (4.8) 31.7 34.6 will continue to maintain a high dividend payout ratio of 70%. Intensified competition in China’s beverage industry. Due to the beverages business in Major Shareholders (%) China is saturated and fragmented, UPC is under pressure to differentiate themselves Cayman President Holdings Ltd. 70.5 from rivals. In addition, consumer preferences uncertainty will drive product diversification in both high-end and low-end products. Auditor PricewaterhouseCoopers Initiate ACCUMULATE. We value the counter at HK$8.2 based on our DCF valuation, which translates into 28.2x FY18 P/E and 2.7x FY18 P/B. Parameters include 0% discount and 3% terminal Price Chart growth rate. We initiate coverage with ACCUMULATE rating and TP of HK$8.2. Turnover (HK$mn) Price (HK$) Investment Summary FY-end DEC 2016 2017 2018E 2019E 2020E Turnover (RMB mn) 20,986 21,297 21,914 22,791 23,702 Chg (%) (5) 1 3 4 4 Net Profit (RMB mn) 607 878 1,086 1,158 1,257 Chg (%) (27) 45 24 7 9 EPS (RMB) 0.141 0.203 0.251 0.268 0.291 Chg (%) (27) 45 24 7 9 P/E (x) 48.8 33.8 27.3 25.6 23.6 P/B (x) 2.5 2.3 2.2 2.2 2.1 P/OCF (x) 13.9 12.1 14.6 13.1 12.1 EV/EBITDA (x) 11.3 10.5 10.5 10.1 9.5 DPS (RMB) 0.028 0.142 0.176 0.188 0.204 Source: Bloomberg, Orient Securities (Hong Kong) Yield (%) 0.4 2.1 2.6 2.7 3.0 Source: Company data, Orient Securities (Hong Kong) Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1 Hong Kong Equity | China Consumer Goods Company in-depth Uni-President China: A major F&B Player in China Uni-President China is Mainland China subsidiary of Uni-President Enterprises Corporation (TWSE: 1216), which is the largest F&B conglomerate in Taiwan and one of the largest in Asia. UPC has commenced operation since 1992 and has now developed into one of the leading manufacturers of beverages and instant noodles in PRC. Figure 1: key milestones Uni-President Enterprises Corporation (TWSE: 1216) Enter into Chinese Business-Uni President China 1967-1973 (The Pioneering Period) Seek and grasped market opportunities in Taiwan On January 13, 1992, the Group launched its first manufacturing plant in Xijiang, PRC. 1974-1982 (Growth Period) Enhanced competitive advantage to cater the needs of consumers 1983-1989 (Conglomeration Period) In 1998, UPC established operational headquarter in Shanghai Developed diversified new business and divided the Chinese market into seven regions: Northeast, to unleash synergistic advantage North, East, South, Central, West, and Xinjiang regions. The group aims to penetrate the market by setting up manufacturing 1990-1998 (Internationalization Period) bases and sales offices in each province. Constructed new plants in emerging markets throughout Asia Pacific, including China, Indonesia, Thailand, Vietnam and the Philippines Nowadays, UPC has 35 manufacturing plants, including the new 1999-Present (Global Village Period) developing plant in Tianjin and sells their products primarily Created competitive products in different countries through their vast network of distributors in first and second-tier of cities in China, accounting for around 90% of sales. UPC is developing the new manufacturing plant in Tianjing which plans to start production in 2019. UPC contains the overall of 78 production lines of instant noodles business and 89 production lines of beverage business. Source: company data, Orient Securities (Hong Kong) Figure 2: Shareholding structure Strong parent company and stable shareholding structure UPC listed on the Hong Kong Stock Exchange in 2007 with its IPO price at Uni-President HK$4.22 per share. The parent company which has a market capitalization of HK$110bn is an ultimate controlling shareholder of UPC, holding approximately 100% 100% 70.5% equity interest. Strong parent company supported UPC to take ownership Cayman President President (BVI) over the operational and strategic decision-making processes. 70.49% 0.05% During the past 11years after listed, UPC expanded and penetrated into Chinese market continuously. The sales amount increased from 8.7 billion yuan to 21.9 Uni-President China billion yuan, at a CAGR of 8.8%. Source: company data, Orient Securities (Hong Kong) See last page for disclaimer. * All selling prices are recorded from Taobao 2 Hong Kong Equity | China Consumer Goods Company in-depth Instant noodle sales bounced back: Entering into the new era China is among the world’s largest consumers of instant noodles. Instant noodles sales in China have increased every year since the 1990s and sold 46.2 billion packages in 2013, which means that 1,465 packages of instant noodles were consumed in every second. However, the sales of instant noodles dropped by 8 billion packages from 2013 to 2016. Low instant noodles sales pointed to the economic rise of rural China and rapid growth of online meal ordering services which increased from 21.68 billion yuan to more than 200 billion yuan from 2011 to 2017, at a CAGR of c.37%. But the Chinese instant noodle market has recovered since 2017, according to the data from Nielsen. The overall sales volume and sales amount increased by 0.3% yoy and 3.6% yoy respectively in 2017. In 2018H1, the warming trend continued more obvious, overall sales volume and sales increased by 5.9% yoy and 10.1% yoy respectively. Figure 3: The overall performance of instant noodles industry in China Overall production volume of instant noodles in china Overall sales of instant noodles in China (Bn package) (Bn yuan) (RMB per package) 40 85 4 ~3 30 36.8 35.1 80 2.23 2.31 2.4 2.45 2.51 3 32.1 29.5 31.2 29.4 81 20 75 2 82 81 77 74 10 70 72 1 0 65 0 2013 2014 2015 2016 2017 2018H1 2013 2014 2015 2016 2017 2018H1 The instant noodles industry has recovered since 2017 because of the rapid sales growth of premium instant noodles Sales distribution by different price level 2016-2020E CAGR 13% 15% 23% : Above 3 yuan/ package and above 4.5 yuan/ cup noodles 69% : 2-2.5 yuan/ package and 3.5-4 yuan/ cup noodles -2% 67% : 1-2 yuan/ package and snack noodles 19% -15% 10% 2016 2020E Source: chyxx(中国产业信息),Orient Securities (Hong Kong) The rebound of instant noodles business reflected rapid changes in consumers’ consumption pattern. The convenience and economical value of instant noodles were the key factors to success in the past. Driven by the growth of consumer spending power and continuous optimization of the consumer environment, consumers are willing to spend more money on improving the quality of life, seeking for psychological and spiritual satisfaction, not just for basic requirements of life.